Customers of Barclays had their money put at risk over an eight-year period because the bank failed to segregate it from its own funds, it has emerged.

Barclays Capital, the investment banking arm, has been fined £1.1m for the failings.

The breaches affected sterling money market deposits of sophisticated individuals and institutions. Ring-fencing clients' money protects it in the event of a bank's insolvency.

BarCap – headed at the time by Bob Diamond, who was appointed chief executive of parent group Barclays on January 1 – put millions of pounds of client cash at risk of potential loss, according to the Financial Services Authority (FSA).

The FSA said BarCap committed a "serious breach" of rules after it failed to segregate client cash in sterling money market deposits from its own funds for up to seven hours a day between December 1 2001 and December 29 2009.

Up to £752m was held in the account at any one time, which would have been at risk if BarCap had gone bust. The fine follows a £33.3m FSA charge on fellow investment bank JP Morgan last June for a similar offence.

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Barclays' fine was reduced from a potential £1.6m, or 1pc of the average daily amount of client cash put at risk, after BarCap agreed to settle at an early stage.

Barclays has now been hit with two hefty FSA penalties for its investment banking arm in less than two years. It was charged £2.5m in 2009 for financial reporting failures within BarCap. Last week it was fined £7.7m over mis-selling funds.

Margaret Cole, managing director of enforcement and financial crime at the FSA, said: "Barclays Capital committed a serious breach of FSA client money rules by failing to segregate millions of pounds of its clients' money for over eight years. This posed a significant risk and the penalty reflects the amount of client money involved in this breach.

"The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected and in the past year has taken enforcement action against firms of all sizes for breaches of its client money rules."

The FSA added that BarCap had not breached the rules "deliberately or recklessly" and confirmed that there was no actual loss suffered by clients. But the bank failed to notify the FSA of the problem for two-and-a-half months.

The issue was first discovered by Barclays in late 2009 after an internal review and was immediately rectified, but senior management were not informed, according to the FSA.

Bosses were only alerted to the breach after a review by external consultants early last year, after which the FSA was notified in March 2010.

A spokesman for BarCap said: "We have worked constructively and in full co-operation with the FSA throughout the investigation.

"The segregation error was corrected on discovery. No counterparties, clients, or financial reports were affected and Barclays Capital did not profit in any way."